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Corporate Finance : Mergers & Acquisitions

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The currently busy market in cross-border mergers and acquisitions could slow significantly if protectionist moves to block such takeovers gain traction under the guise of safeguarding national security and protecting critical infrastructure, including energy, power, communications and transportation, bankers and analysts warn.

In the wake of the political uproar that forced UAE-based Dubai Ports World to give up control of six US ports it acquired from Britain’s P&O;, US lawmakers are drafting legislation that would tighten the review process for foreign acquisition of US companies. Meanwhile, many European governments are taking steps to block foreign takeovers, which now account for more than half of all mergers and acquisitions in the region.

“Despite record growth in international markets, we are witnessing a worrying trend toward political interference in cross-border deals,” says William Mills, chairman and CEO of Citigroup Corporate and Investment Banking for Europe, the Middle East and Africa. Resorting to protectionist measures to thwart such mergers could harm some economies, Mills said in a recent speech in London to the British American Business Council.

In the United States, the Senate Banking Committee unanimously approved a bill on March 31 that, if enacted, will make the national-security review procedure tougher for foreign companies buying a wide range of US assets. The proposed legislation would strengthen the Committee on Foreign Investment in the United States, or CFIUS, which is led by the Treasury secretary and includes representatives from 13 government agencies and departments from the White House, with input from law enforcement and national security officials. The committee has the authority to block foreign takeovers of US-based companies or require changes in the terms of foreign acquisitions that could affect national security.

Senator Richard Shelby, the Alabama Republican who heads the banking committee, began a campaign to revamp CFIUS last summer after the state-owned China National Overseas Oil Corporation, or CNOOC, tried to buy Unocal, one of the largest US oil companies. In June 2005 CNOOC made an $18.5 billion offer to acquire Unocal, topping an earlier bid by Chevron Texaco. The Chinese company ultimately withdrew its offer, however, citing US political tensions.

Broader Definition

In the wake of the CNOOC controversy, the General Accountability Office, the investigative arm of Congress, released a report last September that was highly critical of the CFIUS process and recommended a broader definition of national security and more extensive reviews of proposed foreign acquisitions of US companies. Under the current process, CFIUS conducts a 30-day review before deciding whether to approve a transaction or recommend a more intensive 45-day investigation.

The discussion draft of the Senate bill sponsored by Shelby would have given any CFIUS agency the right to extend the 30-day review period to 60 days. It also would have required that the vast majority of deals proceed to the 45-day investigation phase, even if there were no national-security concerns.

Nancy McLernon, senior vice president of the Organization for International Investment, a business association in Washington representing the US subsidiaries of foreign multinationals, says the legislation forwarded to the Senate floor last month by the banking committee is less draconian than earlier versions. It would require an investigation of a proposed takeover only if there were outstanding security issues.

McLernon says the Shelby bill is a good first step toward restoring confidence in CFIUS without raising barriers to foreign investment in the US, which supports 5.4 million jobs. “We still have concerns, however, with the notification provisions, which require too much information to be sent to too many people,” she says. Business groups have expressed worries that the reporting requirements would create an opportunity for information sent to Congress to be exploited for commercial purposes rather than to improve national security.

House To Pursue Reform

The House Financial Services Committee, chaired by Ohio Republican Michael Oxley, is expected to take up the issue of CFIUS reform after the April recess. McLernon says the hope is that whatever legislation is finally adopted will not have a negative impact on foreign investment. “But the foreign companies are watching,” she says. “The main thing that these companies want is a stable process that can be relied upon with some certainty."

Jeffrey Houle,
partner,
Greenberg Traurig

Oxley said last month that the US should be welcoming and encouraging foreign investment, not shutting it out. “Let’s not be ruled by our worst fears,” he said. “Let’s not close off America as the terrorists would hope we would.”

The Dubai Ports World and CNOOC deals send a message of caution to potential foreign investors, says Jeffrey Houle, partner at Greenberg Traurig, an international law firm with 1,500 attorneys. “There likely will be new legislative authority enacted, and CFIUS in the future will more highly scrutinize proposed deals,” Houle says. This will make cross-border mergers and acquisitions more challenging, he says, although it won’t necessarily have a chilling effect.

Too many people would have to be notified, including members of Congress and state governors, according to Houle. “The more hands you have stirring the pot, the more opportunity there is for politicizing particular investments,” he says. Instead of there being a momentary pause or a passing chill in cross-border deals, the proposed legislation, which was spurred by the Dubai Ports World controversy, will institutionalize the reaction into law, he adds.

Europe Erects Roadblocks

Cross-border mergers in Europe’s consolidating economy are also facing increasing roadblocks as governments seek to protect national corporate icons from being swallowed up by foreign-owned companies. According to Houle, “It cuts against the grain of the concept of the European Union when transactions or whole industries are lumped into a national-security basket for purposes of protection.”

Last year the French government thwarted the takeover of Group Danone, the yogurt maker, by PepsiCo of the US even before a formal offer was made. In the past few months the government has won the right to veto foreign acquisitions in 11 industries, including casinos. The government stepped in quickly when Italy’s biggest utility Enel attempted to acquire Suez, the Paris-based energy and wastewater processing company. It was decided that Suez would be merged with state-owned Gaz de France.

Meanwhile, Mittal Steel, which is based in the Netherlands, is facing objections from regulators in a number of European countries to its proposed acquisition of Luxembourg-based Arcelor, which would create the world’s largest steel company. Mittal, headed by an India-born executive who lives in London, says it will press ahead with the deal, for which it has already arranged financing for the cash portion of E8 billion. Goldman Sachs, Citigroup and Société Générale are the mandated lead arrangers.

In Spain, lawmakers moved to block the takeover of the country’s leading electric supplier Endesa by German utility E.On. Last September Endesa asked EU officials to mediate in an earlier hostile takeover bid by Spain’s Gas Natural.

Bell Labs Targeted

In a cross-Atlantic deal that is sure to face scrutiny, France-based Alcatel and Lucent Technologies of the US last month agreed to merge to create a company that will be based in Paris that will own the Bell Labs research center in New Jersey. The former AT&T; research facility, which does work for US defense and intelligence agencies, would operate as an independent subsidiary.

Despite the threat of a wave of protectionism driven by national-security concerns at the forefront, the total of cross-border acquisitions is expected to swell this year from last year’s nearly $350 billion, which was the highest since 2000. According to Manchester, England-based Bureau van Dijk Electronic Publishing, which maintains a proprietary database known as Zephyr, there were only $557 million of US investments by companies based in the Middle East, excluding Israel, last year, suggesting that fallout from the Dubai Ports World incident could be limited. Since 2000, companies from these Middle Eastern countries completed only $4.2 billion in US investments, while companies based in Israel completed $10.4 billion in US-targeted M&A; deals in the same period, according to Zephyr.

GMAC Finds a Sponsor

US sponsor-backed M&A; volume of $49 billion as of mid-April this year was flat with the same period last year, according to Dealogic. The acquisition of a 51% stake in General Motors Acceptance Corporation, or GMAC, the financial services subsidiary of the US automaker, by an investor group is the largest sponsor-related deal of the year to date.

General Motors sold the majority stake in its lending unit for less than its book value in return for an expected $14 billion in cash over the next three years. Cerberus Capital Management, Citigroup’s private equity group, and Japan’s Aozora Bank, in which Cerberus holds a majority stake, were the buyers. GM has an option for 10 years to acquire GMAC’s global auto-finance operations under certain conditions including a return to an investment-grade rating at the automaker.

Citigroup arranged two syndicated asset-based funding facilities totaling $25 billion to support GMAC’s ongoing business. Citigroup itself has committed a total of $12.5 billion to the two facilities. The GMAC board will have 13 members, including six appointed by the consortium led by Cerberus, four appointed by GM and three independent members. The existing management will remain in place at GMAC.

Meanwhile, an investor group led by affiliates of Kohlberg Kravis Roberts, Five Mile Capital Partners and Goldman Sachs Capital Partners completed the acquisition of a majority interest in GMAC Commercial Holding. GMAC sold 78% of its equity in the commercial mortgage unit, which is changing its name to Capmark Financial Group. In exchange GMAC received more than $1.5 billion in cash, plus the repayment of loans that brought its proceeds to $8.8 billion.

Citigroup, JPMorgan, Credit Suisse, Deutsche Bank, Goldman Sachs and Royal Bank of Scotland were the underwriters of the deal. Capmark simultaneously closed with a syndicate of banks on a $10.75 billion loan facility for intermediate and long-term funding.